Journal entry for sold merchandise on account

Introduction

In the merchandising business, we may need to sell merchandise on account in order to increase the sale volume we can make each year. Likewise, we need to make the journal entry for sold merchandise on account by recording the sale amount that we make into the customer’s account which is our receivable asset instead of recording it into the cash account.

The sold merchandise on account will result in the increase of both total revenues and total assets on the day of selling the merchandise. Additionally, if we use the perpetual inventory system, it will also result in the increase of the cost of goods sold on the income statement as well as the decrease of the asset which is the merchandise inventory on the balance sheet on the same day.

However, if we use the periodic inventory system, the cost of goods sold will only be calculated and recorded at the end of accounting after we have performed the physical count of merchandise inventory to determine the actual balance on hand.

Likewise, the journal entries for sold merchandise on account will be different for those who use the perpetual inventory system and those who use the periodic inventory system. If we use the perpetual inventory system there are two journal entries for the merchandise sale transaction while there is only one if we use the periodic inventory system.

Journal entry for sold merchandise on account

Perpetual inventory system

We can make the journal entry for sold merchandise on account by debiting the sale amount into the accounts receivable and crediting the same amount into the sales revenue.

Account	Debit	Credit
Accounts receivable	$$$
Sales revenue		$$$

In this journal entry, the sold merchandise on account results in the increase of sales revenue and the increase of accounts receivable. Likewise, both total revenues on the income statement and total assets on the balance sheet increase by the same amount as a result.

Under the perpetual inventory system, we also need to make the journal entry for the cost of goods sold in order to account for the decrease of merchandise inventory by debiting the cost of goods sold account and crediting the merchandise inventory account.

Account	Debit	Credit
Cost of goods sold	$$$
Merchandise inventory		$$$

Periodic inventory system

Under the periodic inventory system, the journal entry for sold merchandise on account is the same as the journal entry made under the perpetual inventory system above.

Account	Debit	Credit
Accounts receivable	$$$
Sales revenue		$$$

However, it is different regarding the treatment of the cost of goods sold under the periodic inventory system comparing to that of the perpetual inventory system. In short, there is no journal entry of the cost of goods sold for the sale transaction of merchandise under the periodic inventory system.

Under the periodic inventory system, even though, the merchandise inventory decreases as a result of the sale, the amount of cost of goods sold will only be updated at the end of the accounting period when we perform the actual physical count of the merchandise inventory that we still have on hand.

Likewise, the journal entry for the cost of goods sold will only be made at the year end adjusting entry and it will not be for any particular sale transaction but for the whole merchandise inventory sold during the accounting period.

Cash received for the sold merchandise on account

Later, when we receive the cash payment for the sold merchandise on account we have made previously, we can make the journal entry to eliminate (or reduce) the customer’s receivable account that we have recorded by debiting the cash account and crediting the accounts receivable.

Account	Debit	Credit
Cash	$$$
Accounts receivable		$$$

The journal entry for cash received from the sold merchandise on account is the same for both the perpetual inventory system and the periodic inventory system.

Sold merchandise on account example

For example, on September 1, we make a $5,000 merchandise sale on account to one of our customers. Later, on September 25, the customer pays $5,000 for the sold merchandise on account we made early on September 1.

Assuming we use the perpetual inventory system and the merchandise’s original cost is $3,000 in our inventory record.

What is the journal entry for sold merchandise on account on September 1 and September 25?

Solution:

On September 1

In this example, we can make the journal entry for sold merchandise on account by debiting the $5,000 into accounts receivable and crediting the sales revenue account with the same amount of $5,000 on September 1, as below:

Account	Debit	Credit
Accounts receivable	5,000
Sales revenue		5,000

In this journal entry, both total assets on the balance sheet and total revenues on the income statement increase by $5,000.

At the same time, as we use the perpetual inventory system, we also need to record the $3,000 cost of merchandise inventory as the cost of goods sold since the sale transaction results in the decrease of the merchandise inventory by $3,000. Likewise, we can make the journal entry for the $3,000 cost of merchandise inventory as below:

Account	Debit	Credit
Cost of goods sold	3,000
Merchandise inventory		3,000

As a result of the two journal entries above, the effect on the balance sheet is the increase of $2,000 of total assets which are from the $5,000 increase of accounts receivable and the $3,000 decrease of merchandise inventory $3,000.

On the other hand, the effect on the income statement is that the sales revenue increase by $5,000 and the cost of goods sold increase by $3,000 resulting in the increase of net income before interest and tax of $2,000 (assuming no discount or return later on).

On September 25

On September 25, when we receive the cash payment of $5,000 for the sold merchandise on account that we have made previously, we can make the journal entry as below:

Account	Debit	Credit
Cash	5,000
Accounts receivable		5,000

In this journal entry, there is no impact on the total assets on the balance sheet as both cash and accounts receivable are asset accounts.